Working Papers

Do Credit Card Companies Screen for Behavioral Biases?  

with Antoinette Schoar (MIT)

NBER Working Paper No. 22360

Presentation in 2016 AFA meetings, NBER 2016, ABFER 2017

Abstract: We analyze the supply side of credit card markets, and the pricing and marketing strategies of issuers. First, card issuers target less-educated customers with more steeply back-loaded and hidden fees (e.g. higher late and over-limit fees). Second, issuers use rewards programs to screen for unobservable borrower types. Finally, we use increases in state-level unemployment insurance (UI) as positive shocks to creditworthiness and show that issuers rely more on back-loaded (hidden) fees when UI increases, especially for less-educated customers. This result documents a novel trade-off: card issuers weigh short-term fee maximization against increases in credit risk, when using back-loaded fees. 

In Brief: NBERWSJWashingtonPost


Strategic Choices of Local Politicians in China: The Interplay of Economic, Political Activities, and Promotion Prospects

with Meng Miao (Renmin University of China) and Shang Zeng (University of Wisconsin-Madison)

Presentation in NBER 2023

Abstract: Through a unique database on daily activities of municipal party secretaries, we find that they spend a significant part of their work time on political and propaganda activities, including organizing various meetings to promote the central government's spirit ideology. We find that officials engage in these behaviors more often before a government reshuffle, plausibly tend to leave a loyal and obedient impression on the superior government and increase their promotion probability. This is on contrary to economic behaviors, which are more common in the early stages of officials' terms, possibly because investment projects require time. This is more evident among younger, well-educated politicians due to age-based promotion restrictions. Our study may shed light on how the Communist Party of China balancing economic development and political loyalty when selecting officials.


State Versus Market: China's Infrastructure Investment

with Shuoge Qian (NTU) and Wei Xiong (Princeton)

Abstract: Amid growing global interest in state interventions, this paper examines the impact of Chinese government infrastructure investments on improving firm productivity. It centers on a policy aimed at directing regional governments to foster a more conducive market environment for private enterprises. Our analysis reveals that the positive effect of infrastructure investment on firm productivity is increased by 42.5% for private firms in industries that benefitted from improved market entry opportunities and an even more striking 97.9% in provinces where arbitrary fines were curtailed. These findings underscore the complementary roles of state interventions and the development of market mechanisms in boosting firm productivity.


Rise of Bank Competition: Evidence from Banking Deregulation in China  

with Haoyu Gao (Remin University of China)Robert M. Townsend (MIT), and Xiaoguang Yang (CAS)

NBER Working Paper No. 25795

Award for Outstanding Paper in 12th International Conference on Asia-Pacific Financial Markets, 2017​

Award for Best Paper in the 2nd New Institutional Accounting Conference, 2018

Presentation in NBER 2017, CICF 2017, AFA 2018 , ABFER 2018, EFA 2018

Abstract: Using proprietary individual level loan data and population bankbranch data,this paper documents the economicconsequences of the 2009 bank entry deregulation in China. We find that the deregulationleads to higher screening standards, lower interest rates, and lower delinquency rates of the loans from the new entrant banks. The incumbent state-owned banks do not respond much to the deregulation. Consequently,for the firms with bank credit access, the deregulationleads to increases in asset investment, employment, net income, and ROA in deregulated cities. These positive effects on loan terms and firm activities are more pronounced for private firms than state-owned enterprises (SOEs).In contrast, the deregulation amplifies bank credit from productive private firms to inefficient SOEs due mainly to SOEs’ soft budget constraint. This unintended adverseeffect accounts for 0.31% annual GDP loss. 

In Brief: ABFER, VoxChina


The Effects of Environmental Policy on Industrial Pollution : A Supply Chain Perspective

with Endong Yang (University of Macau) and Kunru Zou (Remin University of China)

Abstract: Using plant-level pollution data from Environmental Survey and Reporting Database in China, we analyze how government 2007 environmental policy aiming to curb pollution from two-high industries (i.e., high-polluting and high energy-consuming) affect real firm pollution activities across the supply chain. We empoly the Differences-in-Differences approach and find that following the 2007 environmental policy, firms in two-high industries that are mostly in the upstream of the supply chain indeed reduce emissions of air and water pollutions significantly (e.g., sulfur dioxide (SO2), chemical oxygen demand (COD), and wastewater). Such reductions are mainly due to higher pollution removal and the increased investments in treatment facilities that are funded by subsidized bank loans such as the China Development Bank (CDB). By contrast, following the 2007 policy, firms in the downstream of two-high industries increase their production levels without any increases in their pollution treatment facilities and capabilities, which leads to increased pollution levels such as SO2 emissions and coal consumptions. Furthermore, such negative spillover effects in downstream industries can be alleviated by the CDB loans, which help finance the investments in pollution treatments for these downstream firms. Our findings about direct and unintended spillover effects of the environmental policy suggest that policy makers should carefully consider all potential impacts across the supply chain when designing the package of enviromental policies to mitigate unintended adverse consequences. 


Force behind Anti-Corruption: Evidence from China 

Presentation in MPSA 2019, APSA 2019, AEA Poster Session 2024

Abstract: This paper documents the clientelism in anti-corruption investigations across the politician patronage network in China. The connections to highly ranked politicians (i.e., Politburo of the Communist Party of China) make local politicians 56.3% less likely to be investigated and receive lighter sentences after being investigated. I employ a regression discontinuity design to establish the causality of this protection effect. I use the mandatory retirement age of 68 years old for Politburo members as the cut-off and find discontinuous jumps in the investigation probability of local politicians when their connected Politburo members step down at the retirement age cut-off.


Beyond Profits: How Government Ownership Shape the Pay Dispersion of the Top Management Team: Evidence from China

with Wei Jiang (Remin University of China)Bin Ke (NUS), and Yue Xu (Sun Yat-sen University)

Presentation in AAA 2019

Abstract: In this study, we examined the influence of government ownership on pay disparity within top management teams (TMT) of Chinese State-controlled Enterprises (SOEs) versus Chinese non-SOEs and its impact on firm performance. Consistent with the social-political perspective—which suggests that SOEs prioritize government-favored social and political objectives over maximizing shareholder value-we find that TMT pay dispersion is notably smaller in SOEs, especially in central government-controlled SOEs where top executives have high political advancement prospects. SOEs in cities prioritizing social harmony also have narrower TMT pay gaps. Although local labor markets influence pay dispersion in non-SOEs, this isn't the case for SOEs. We found that reduced TMT pay disparity in SOEs correlates with decreased firm performance, observed across both vertical and horizontal pay differences. Our results challenge conventional managerial compensation theories from market-driven economies.


Kinship Network Enhanced by a Formal Financial Intervention: Costly State Verification and the Thai Village Fund

with Robert M. Townsend (MIT)

Abstract: Transfers (gifts) among poor households play a crucial role in funding investment, a role amplified by a quasi-formal village fund program in 2001, especially for those with preexisting informal kinship ties. Moreover, we document financial regime shifts using maximum-likelihood estimation. Two exogenously incomplete regimes (saving only and lending/borrowing) dominated for the relatively poor before the village fund, but costly state verification, a less incomplete financial regime, dominates in the subsample of poor households connected via kinship to the village fund. The structurally-estimated verification cost of these households is also significantly lower than those without kinship after 2001, relative to before. 



Government Credit, a Double-Edged Sword: Evidence from the China Development Bank (Single-authored)

Journal of Finance, 2018, 73.1, 275-316 (Data and Code For Replication)

Award for Best Paper in Corporate Finance, SFS Cavalcade, 2015 (finalist)
Best Ph.D. Dissertation in Honor of Professor Stuart I. Greenbaum, 2014, Washington University in St. Louis (finalist)

Abstract: Using proprietary data from the China Development Bank (CDB), this paper examines the effects of government credit on firm activities. Tracing the effects of government credit across different levels of the supply chain, I find that CDB industrial loans to state-owned enterprises (SOEs) crowd out private firms in the same industry but crowd in private firms in downstream industries. On average, a $1 increase in CDB SOE loans leads to a $0.20 decrease in private firms' assets. Moreover, CDB infrastructure loans crowd in private firms. I use exogenous timing of municipal politicians' turnover as an instrument for CDB credit flows. 

In Brief: VoxChina

Subnational Debt of China: The Politics-Finance Nexus 

with Haoyu Gao (Remin University of China) and Dragon Tang (HKU)

Journal of Financial Economics, 2021, 141.3, 881-895

Presentation in 2018 SFS Cavalcade North America Conference, ABFER 2017, CICF 2017

Abstract: We provide direct evidence of selective default on government debt when creditors can be identified. Using unique loan-level data, we find that local governments in China choose to default on banks that have weaker political power, as those banks have little influence over local politicians’ career advancements. Politically powerful banks experience lower default rates in local government lending. However, when local politicians are highly ranked or connected to national leaders, their promotions are less dependent on loan performance, hence they engage less in selective default. Our findings reveal a politics-finance nexus, which explains why governments do not default more often.

In Brief: VoxChina


Combating the COVID-19 Pandemic: The Role of the SARS Imprint 

with Endong Yang (University of Macau) and Kunru Zou (Remin University of China)

Management Science, 2021, 67.9, 5606-5615 (Data and Code For Replication)

Abstract: We provide evidence of delayed attention and inaction in response to COVID-19 in countries that did not experience SARS in 2003. Using cross-country data, we find that individuals in countries that had SARS infections in 2003 searched more intensively for COVID-19-related information on Google in late January 2020, the time of the first known outbreak in Wuhan, China. Early attention to the novel virus, as measured by Google searches, is associated with deeper stock market drops in countries with SARS experience. In contrast, people in countries without SARS experience started to pay more attention much later, in March. Moreover, governments in these countries responded significantly more slowly in implementing social distancing policies to combat domestic COVID-19 outbreaks than governments in countries with SARS experience. Moreover, such early responses of individuals and governments in countries with SARS experience are prevalent within continent, even in non-Asian countries. Furthermore, people in countries with SARS experience are more compliant with social distancing rules. These timely attention and proactive responses of individuals and governments are more pronounced in countries that reported deaths caused by SARS, which left deeper imprints. Our findings suggest that the imprint of similar viruses’ experience is a fundamental mechanism underlying timely responses to COVID-19.

In Brief: Informs Resoundingly Human


The Informational Role of Ownership Networks in Bank Lending 

with Haoyu Gao (Remin University of China) and Xiaoguang Yang (CAS)

Journal of Financial and Quantitative Analysis, 2022, 57.8, 2993-3017

Presentation in CICF 2019

Abstract: This paper documents novel large-sample evidence on the informational role of interfirm ownership networks in bank lending. Using comprehensive loan-level data in China, we find that banks’ internal loan ratings at issuance predict subsequent delinquent events more accurately when borrowers are connected to banks’ existing customers via ownership networks. In post-issuance monitoring for delinquent loans, banks with access to ownership networks manage to downgrade their initial ratings before late payments. These findings suggest that ownership networks help the transmission of private information for bank lending. Moreover, ownership networks are more important for transmitting information related to small and medium enterprises.

In Brief: VoxChina


How do Individual Politicians Affect Privatization: Evidence from China 

with Kunru Zou (Remin University of China)

Review of Finance, 26.3, 637-672

Presentation in AFA 2020, SFS Cavalcade Asia-Pacific 2019

Abstract: This paper investigates how politicians’ patronage connections affect privatizations in China. The connections to top political leaders (i.e., Central Committee of the Communist Party of China) make local politicians engage more in rent-seeking by selling state-owned enterprises (SOEs) at substantial discounts. These connected local politicians are also more protected in anti-corruption investigations, thus extracting more rents by selling SOE assets at substantial discounts. Consequently, the privatizations conducted by the local politicians with patronage connections achieve significantly lower gains in efficiency and performance. To identify the role of patronage connection in privatization, we use the mandatory retirement age cut-offs of Central Committee members in the regression discontinuity design. We find drops in price discounts of privatization deals and jumps in efficiency for privatized SOEs when local politicians lose connections to Central Committee members around the retirement age cut-offs.


Carbon Emission Trading and Environmental Protection: International Evidence

with Jennie Bai (Georgetown)

Management Science, Accept (Data and Code For Replication)

NBER Working Paper No. 30587

Abstract: We study how the implementation of emissions trading systems (ETS) impacts emissions reductions and the usage of renewable energy using a panel sample of the largest 100 countries worldwide. Exploiting the cross-country variations in ETS implementations, we show that ETS adoption materially reduced greenhouse gas (carbon dioxide) emissions by 12.1% (18.1%). Moreover, ETSs reduced the overall emissions by cutting fossil fuel usage, such as coal, by 23.70% while boosting the usage of renewable energy by 61.59%, on average. In contrast, the introduction of carbon taxes has a less effective impact on emissions reduction and fails to boost the usage of renewable energy. We study how the implementation of emissions trading systems (ETS) impacts emissions reductions and the usage of renewable energy using a panel sample of the largest 100 countries worldwide. Exploiting the cross-country variations in ETS implementations, we show that ETS adoption materially reduced greenhouse gas (carbon dioxide) emissions by 12.1% (18.1%). Moreover, ETSs reduced the overall emissions by cutting fossil fuel usage, such as coal, by 23.70% while boosting the usage of renewable energy by 61.59%, on average. In contrast, the introduction of carbon taxes has a less effective impact on emissions reduction and fails to boost the usage of renewable energy. 


Government Credit and International Trade

with Endong Yang (University of Macau)

Journal of Financial and Quantitative Analysis, Accept

Presentation in SFS Cavalcade North America 2019, ABFER 2019, AEA 2020

Abstract: Using transaction-level trade data from China Customs and loan data from the China Development Bank (CDB), we find that CDB credit to strategic industries at the top of the supply chain leads to lower prices, higher volumes, and more product varieties and destinations of exports for downstream firms. For mechanisms underlying such positive spillovers,we find that CDB loans to upstream industries significantly lower the prices of intermediate goods sold by upstream firms, which, in turn, reduces downstream firms’ costs of goods. Moreover, CDB loans to upstream industries increase accounts receivable of upstream firms and accounts payable of downstream firms.


Early Life Experience and CEO's Reactions to COVID-19 

with Endong Yang (University of Macau) and Kunru Zou (Remin University of China)

Journal of Accounting and Economics, Conditional Accept

AEA Poster Session 2024

Abstract: This paper studies how CEOs’ early life experiences of natural disasters affect corporate activities during COVID-19 pandemic in the U.S. We find that following the initial outbreak of COVID-19 in late February 2020 in the U.S., most firms started to cut down capital expenditure (Capex), research and development (R&D) investments, and selling, general and administrative expenses (SG&A). More interestingly, such patterns are significantly more pronounced for CEOs with early life experience of natural disasters than CEOs without such experiences. In the reopening period from the second half of 2020, firms managed by CEOs with early disaster experiences achieved better performance. It is almost impossible to foresee the outbreaks of COVID-19, and it is unlikely to select CEOs with experience of similar infectious disease outbreaks before COVID-19. To further establish the causal effects of CEOs’ early life experience on corporate activities, we find that CEOs who experienced outbreaks of diseases with symptoms or modes of transmission similar to COVID-19 react significantly more strongly (e.g., reductions in Capex, R&D, and SG&A) than CEOs without such experience. Our findings identify the essential role of CEOs in corporate governance, especially the long-run effects of their experience in early life.